CRUDE: OIL ON THE BOIL AGAIN

MARGIN POINT

It's gain some, lose some Stocks Of Auto, Aviation May Be Hit, But Strong Re May Cushion Impact

CRUDE prices are once again on an upward spiral leading to fears about the impact on the margins of companies in various sectors. Analysts tracking markets say any further increase could lead to inflation rising at a faster pace. As a consequence, stocks in sectors like fertiliser, textiles, pharma, automobile, tyre, paints and aviation could be affected if the surge continues. 

    However, the strong rupee will act as a countervailing force which may ensure that their cost of raw material does not spin out of control. But should crude go beyond $100 a barrel from the levels of $80/barrel, there could then be some real cause for concern, feel analysts. 
    "Crude oil prices have more than doubled from their 52-week low levels. If the price of crude oil continues to increase and if the government decides to pass on the additional cost to consumers, it is expected to lead to an increase in inflation at a much faster pace compared to the anticipated level of 6% by March 2010. In an otherwise scenario, if the price increase is not passed on and the government bears the hike in the price of crude oil, then the fiscal deficit situation is expected to worsen further from the budgeted 6.8%. If the fiscal deficit figure, which is closely monitored by investors, rises beyond an extent then it can negatively impact the broader markets," says Vishal Jajoo, research analyst of FCH Centrum Wealth Manager. Oil prices have tumbled from the historic highs of more than $147 per barrel in July 2008 to about $32 per barrel in December because of the global recession, but have since risen on hopes of recovery. While the prices have still not gone to dangerous levels, they are not very far from it, say analysts. "While so far the direct impact has been limited, if prices retain this momentum, it could adversely impact companies' profitability. The market is in a wait-and-watch mode," said an analyst with a domestic brokerage. 
    The worst hit would be companies that rely on petro products either as feedstock or for meeting their energy needs. The list includes companies in sectors as diverse as tyres, cement, fertilisers & chemicals, synthetic textile, among others. In the tyre industry, for instance, bulk of the feedstock is derived from crude oil and its downstream products. The previous rally in crude oil prices resulted in a sharp rise in industry's raw material cost and adversely affected the company's profitability. In the past 3-4 years, industry's raw material cost as a percentage of net sales jumped 600-1000 basis points to over 70% currently. A similar trend was visible in synthetic textile, fertilisers & chemicals industry. 
    Some of the leading firms that will be affected in the tyre industry include Apollo Tyres, MRF, Ceat and JK Tyre, among others. Among fertiliser companies, Chambal Fertilisers, Zuari, RCF and Nagarjuna Fertilisers will take the maximum hit. In the textile sector, the impact would be felt by companies like Century Enka, Vardhman Textile, Garware Wall-ropes and RSWM, among others. With its fortunes directly linked to international prices of aviation turbine fuel (ATF), stocks of Deccan Aviation, Jet Airways and Spice Jet could be another casualty of rising oil prices. 
    But some companies will benefit. Analysts maintain that investors should preferably invest in companies like ONGC, Reliance Industries and Cairn India, particularly if oil continues to explore higher levels. Some other sectors that would be positively impacted because of high crude prices are offshore services providers Great Offshore, Aban Offshore, Garware Offshore and ancillaries like Selan Exploration and Shiv Vani Oil. Shipping companies Varun Shipping, Shipping Corporation of India, GE Shipping and Essar Shipping, which carry crude, are also likely to benefit as demand will be higher.

Gold bought from banks hard to resell

In the mad Diwali rush for gold, a sobering fact is that one could be stuck for good with bars and coins that banks sell. They cannot be re-sold to banks. For those who buy them for investment purposes, to make money in a rising market, this is a deterrent.
If these bars and coins must be sold back, for whatever reason, the only easy option is to go to the neighbourhood pawnshop or jeweller, in which case, shortchanging is guaranteed. Another option is to find a non-banking financial company (NBFC) that buys gold.
Few gold buyers know that Reserve Bank of India (RBI) rules allow banks to sell gold, but not buy it back from customers.
"We only sell gold coins for a fee... We are not allowed to trade or take positions in bullion. A customer (who buys from a bank) has to go to the open market if he wants to sell it," V Krishnaswamy, general manger at Indian Overseas Bank, said.
Buying of gold from banks, both government public and private sector entities, reaches a peak during the Diwali season, especially on the occasion of Dhanteras.
Those in gold trade and promotion say the RBI policy creates difficulties for the average buyer. "Customers often end up at the doorstep of small jewellers, who offer lower rates," Ajay Mitra, managing director of the India chapter of the World Gold Council, told Financial Chronicle.
Most banks, including State Bank of India, ICICI Bank and HDFC Bank, have been very aggressively promoting the sale of gold coins and bars.
The NBFCs that do buy or sell gold are few and far between, but they do not buy coins originally sold by others, among them is the Muthoot group of Kerala.
"We only sell gold coins. Since banks do not buy back gold coins, we don't think it is prudent for us to do so. Customers need to tap the open market to sell them," V J Matthew, chief executive officer of the precious metal division of the group, said.
Another south-based NBFC, Mannappuram Finance, also accepts gold from customers, but only those who have bought it from them. This company, too, does not accept gold coins bought from banks.
"We sell gold coins and also buy back at market prices, but only from our customers. Our primary focus is on developing our own gold coin business," V K Joshi, the company's assistant general manager, said.
Most jewellers will give new ornaments in exchange for old ones. But the exchange always takes place at the huge discount on the price of the old jewellery. Tanishq, a big organised jeweller, accepts bars and coins back from customers who have originally bought them from it – but this is done at a discount on the market price.

"In buying back gold coins and bars, the company has a policy of deducting 5 per cent from the market price," said N Vidya Sagar, Tanishq's business manager for the northern region. The company does not buy coins and bars that have been originally bought from other sources.
The price of gold coins differs from bank to bank. A 24-carat, 10 gm gold coin at State Bank of India costs Rs 17,518, inclusive of all taxes; at HDFC Bank it will cost Rs 17,606. The market price of gold as on Monday stood at Rs 15,930 per 10 gm.

So does it make sense to invest in commodity-based stocks & futures?

GREENER PASTURES Spot prices of agricultural commodities have zoomed in the last two years & so have stocks of cos involved in these products.  Aman Dhall guides you  ARE YOU the one who buys grocery and food items for your family on a daily basis and that too from a mandi? If the answer is 'yes', then you must have shared at some point in time the agony of rising prices and how it's eating into your savings with your friends or colleagues or with family members. But how many of you have ever utilised this very market knowledge of daily bargains with wholesalers to invest in commodity futures or stocks of companies that are involved in the manufacturing of commodities? Chances are there'll be very few who would have had an answer in affirmative. Commodities are considered risky yet rewarding investments, if done with proper due-diligence. Over the last two years, spot prices of agricultural commodities have sky-rocketed in India and with that the stock prices of companies involved in that too have shot up.  To help you with your investments in commodity-based stocks and commodity futures, here's a low-down on what makes better investment sense in the current scenario.  GAZE AHEAD  Less than normal monsoons have paved the way for a bumper season for the agricultural stocks on Dalal Street. These stocks have soared by over 45% on an average since June 1. With the demand scenario still buoyant, analysts believe commodity prices won't come down significantly and commodity stocks will remain steady, stable and inch upwards. "The gains,however, may not be as high as they were during the last few months," says Sudip Bandyopadhyay, CEO of Reliance Money.      Despite the monsoons picking up in the later half of the season, analysts don't see any reversal in fortunes of these stocks unless there is an uncertainty on the forecast for the next crop season. If there is a slight fear of a dull season ahead, the rally might well continue, they argue. International agricultural production too has remained on the lower side so far. "This trend can continue for some more time. Yet it is advisable that only those with a healthy risk appetite enter these stocks on declines," says Ashish Kapur, CEO of Invest Shoppe, a Delhi-based broking firm.  WATCH FOR CYCLE  For starters, trading in commodity futures is considered a leveraged position. Commodity prices move purely on the demand-supply scenario. So, financial discipline most often than not decides the outcome of your trades. Factors such as rainfall levels, sowing-harvesting cycle, government polices and macro economic outlook decide the direction in which the commodity prices move.      Analysts hold a mixed outlook for agricultural commodities for the next few months. While they are bullish on some commodities, there is a bearish attitude too for others. For instance, they expect Guarseed prices to move up due to deficient rains in Rajasthan and Haryana during the main sowing period from June to August. But on the contrary, they see soybeans prices remaining subdued with good production prospects in India and the US.      Analysts are bullish on the prospects of commodities such as coffee, rice and sugar. "Coffee has a longer gestation period as compared to tea. So the production of coffee is quite less as compared to its substitute, tea," says Kapur. On the other hand, rice demand is anticipated to grow as consumption depends on two major factors — population and income, both of which are growing in India. Moreover, due to drought in some rice growing parts of the country, the production of non-basmati rice is expected to decline. Sugar story is no different. The prices have moved up smartly in domestic as well as global markets. "Demand has grown from various countries, including Brazil. India, one of the exporters of sugar, could well become a net importer of sugar, if the shortage continues," points out Kapur.  DIVERSIFICATION GAIN  As a thumb rule, you should remember that the price of a commodity and its corresponding stock price doesn't have a direct co-relation. There are a multitude of other factors such as management quality, cash flow situation and overall market confidence, in addition to the commodity prices, that help arrive at the stock price, and thus is the difference in the level of returns. "However, if other things were equal, the commodity prices do form the most important factor in pricing commodity shares," says Jayant Manglik, president of Religare Commodities.      Given that the current period is the peak harvest season, market experts are against investments in the agri commodities.      Buying commodity stocks, they say, makes better sense as not only does one get better returns when the trend of a commodity is rising but one also pays the whole amount purchasing a share and hence is not leveraged. "High volatility in commodity prices means only those who have capacity to pay the margin calls on time gain from the uptrend. That's why buying stocks is considered a better option," explains Dilip Bhatia, director and head of Kotak Commodities.      Sensitivity of commodity prices to news flow in the short run is another drawback. On the other hand, stocks have a diversification benefit. You have the option to buy stocks of companies which have exposure to more than one commodity.      aman.dhall@timesgroup.com